Analysis of Politics, Philosophy and Economics from a Marxist Perspective

Tuesday, 27 June 2017

Why Aren't All Governments Issuing 100 Year Bonds?

Argentina has just issued a 100 Year Bond. They offered $2.75 billion in bonds
with a fixed coupon of 7.9%. Despite the duration of the bond going
beyond the lifetime of any average human being, speculators clamoured
to buy it. They received $9.75 billion in orders, meaning that it
was covered at a rate of nearly four times. So, the question is, why
aren't all governments taking advantage of lifetime low rates ofinterest, around the globe, to borrow over these long periods?

Just to be
clear what the fixed coupon on such a bond means; its this. If you
buy a $1,000 bond, at par, in other words, you actually pay $1,000
for it, then every year, for the lifetime of the bond, you will get
paid a fixed amount of money, say $100, which is the coupon. That is
the equivalent of 10% interest. In fact, because the demand for such
bonds, may be more or less than is supplied, the actual price that
the bond is bought and sold for may be more or less than its face
value. If the demand for the bond exceeds the amount of bonds
issued, the price of the bond will rise, and vice versa. If the
price of bonds rises, then the fixed coupon payment on them
represents a lower rate of interest, or yield.

Suppose, the
price of the bond rises to $1,250. In that case, the $100 coupon
represents a yield of only 8%. Bonds that have been already bought get traded in the global bond markets, in the same way that shares
are traded. The prices of all these bonds move up and down for a
variety of reasons, and the movement of the bond prices then affects
the yield on those bonds, which also plays into speculators
considerations of how much they are prepared to pay for shares, or
property, in order to obtain dividends or rent. There are then two
things the speculators are interested in when it comes to such bonds,
and the same applies to shares and property. One is the yield such
assets provide, i.e. how much does it pay the owner in coupon, or in
dividends or in rent. The other is the capital gain or loss. In
other words, if I buy a bond for $1,000, it may rise in price to
$1,250, in which case, although the rate of interest it pays me falls
from 10% to 8%, it provides me with a $250, or 25% capital gain. The
two things are inversely correlated.

The 7.9%
fixed coupon that Argentina is providing on this bond might seem
quite high, but this is Argentina we are talking about. Not the
world's safest place to lend your money. The yield on an Argentinian
10 Year Bond, for example, is around 4.75%, compared to 1%, for a UK
Ten Year Gilt. The current Yield on the UK 30 Year Gilt, is only
1.68%. One could easily imagine that the UK could sell a 100 Year
Bond, therefore, with yields of only around 3 to 3.5%.

Imagine that
you are a 20 something house buyer, and the bank offers you the
possibility of a 100 year fixed rate mortgage at an interest rate of
3%. Or, imagine you are a business that needs money-capital to buy
buildings, machines and so on, and the bank offers you a loan on the
same basis. If you had any sense, you would snap their hand off.
The reason being that over time the effect of inflation is to reduce
the actual value of the interest payment. Suppose, you had borrowed
£3,000 in 1960, at a fixed 3% rate of interest. It would have
bought you a very nice above average house. Wages at that time were
on average less than £1,000 a year. The interest on the £3,000
loan would have been £90, or the equivalent of about 5 weeks wages. However,
consider what the position is nearly 60 years later. The £3,000
would today be a £280,000 house, and the £90 of interest per year,
would amount to only about one day's wages, for someone on average
earnings. And, in the intervening period, your would have been laughing all the way to the bank when mortgage rates rose to over 15% in the early 1990's, and you could just have put what spare cash you had from the original loan into the bank, that would have paid you multiples in interest of what the loan was costing you. If you had known you would have borrowed not £3,000, but £30,000, if they would lend it to you!

For the last
35 years, global interest rates have been in a secular downward
trend. The underlying basis for that is that the supply of
money-capital exceeds the demand for money-capital. The initial
cause of that was that in the early 1980's, when this trend started,
there was global stagnation. Businesses did not want to accumulate
addition capital, and for what they did want to accumulate, their
profits were more than adequate. By the late 1980's, and into the
1990's, although businesses did begin to accumulate capital, rapid
changes in technology meant that the prices of a lot of the machines
and other fixed capital they were buying was becoming ever cheaper,
both in real terms and absolutely. That meant that all of the fixed
capital stock suffered a significant moral depreciation, which
causes the annual rate of profit to rise.

For example,
in the mid 1980's, I went to computerise the payroll and accounts
system of a local engineering company, and to provide them with a
computer system to monitor their workflow. The firm already had CnC
lathes and milling machines, which were semi-controlled by computer
programmes stored on punch cards. One of the things they asked me to
look at was putting those programmes on a PC, with an interface to
the machine. PC's, even by that time had become so cheap that this became possible. These same increases in productivity that had been
driven by an incentive to introduce labour-saving technologies in the
late 1970's, and early 1980's, had also acted to raise the rate of surplus value, and subsequently the rate of profit. Across the
globe, businesses were making larger masses of profit, whilst the
cost of their fixed capital was falling, and wages were also falling
in real terms, and sometimes absolutely.

Even as
capital accumulation proceeded, therefore, the mass of realised
profits increased even faster, so that the supply of loanable
money-capital kept rising faster than the demand for it, pushing
global interest rates to ever lower levels. And, the other side of
these lower interest rates, as set out above is that the prices of
financial assets rise. It was this continual fall in global interest
rates, that sent the prices of shares, bonds and property ever higher
during the 1980's, and 1990's. But, this has perverse effects.

In the 19th
century, in the era of the monopoly of private capital, private
capitalists and their families, held their wealth in the form of
actual capital, just as previously the landlords held their wealth in
the form of land. They owned businesses, and all of the buildings,
machines, materials etc. that made up those businesses. They owned
the actual capital that produced the profits, and they took their
income in the form of those profits. But, by the latter half of the
19th century that had changed. The most important part of
the economy was made up of firms that were themselves legal entities,
corporations, that owned the capital. The private capitalists were
reduced to the role of being merely money lenders to such companies,
and instead of receiving their income as profits, they received their
income as interest on the money they had loaned to these companies.
They received dividends on shares, and coupon on corporate bonds and
debentures. Its what leads Engels to talk about them being reduced
to a bunch of “coupon clippers”.

The
continual fall in global interest rates has perverse effects, because
it means that as the prices of the financial assets,
fictitious-capital, in the shape of shares, bonds and property,
continually rises by huge amounts, so the yields on these assets go
lower and lower. The revenue of all these coupon clippers depends
upon the yield, and so we see the phenomenon that Andy Haldane at the
Bank of England described, whereby in the 1970's the proportion of
profits going to dividends was only around 10%, whereas today it is
around 70%. In other words, because these large shareholders have
control over company boards, and appoint the top executives, to look
after their interests, rather than the interests of the company, more
and more of company profits goes to pay dividends, as dividend yields
fall, and less and less, as a proportion goes to real investment in
the business.

So, long as
the mass of profit is rising by large amounts, as it was in the
1990's, that does not matter so much, because even a smaller
proportion of this profit, going to accumulation, can still amount to
a larger absolute amount of capital accumulation, and growth. It
becomes a problem when that mass of profit starts to grow less
rapidly, and when the amount paid in dividends still increases
proportionally. And, at the same time, the mass of profit itself
depends, both on the rate of surplus value, driven by rising
productivity, and on the amount of capital/labour-power employed. If
accumulation slows, so that the amount of labour-power being employed
slows, and/or if the rate of surplus value falls, because
productivity growth slows, then the mass of profit will grow more
slowly, which creates a vicious circle, because then less capital is
available for accumulation, and so on.

The reason
we have seen such dramatic, and so many financial crashes in the last
thirty years, is because financial asset prices have been continually
driven higher, whilst that same fact has drawn more and more loanable
money-capital into speculation in such assets, and away from capital
accumulation. Financial asset prices have been driven ever higher,
but the material basis for maintaining those asset prices, in the
longer term, the ability to produce ever larger masses of profit, has
been undermined by the same process, because ever larger masses of
profit requires, ultimately ever larger accumulation of capital.

And the
other perversion that these high asset prices has caused is that the
owners of fictitious capital, lost interest in obtaining yield as a
source of revenue, and instead became fixated on the capital gains
they were making as their shares, bonds and property appeared to
magically increase in value, year on year, month on month, day by
day. The global top 0.001% own nearly all of their wealth in the
form of this fictitious capital. It is the astronomical rise in the
prices of these assets that gives the large rise in inequality of
wealth that has been seen. Not surprisingly, the owners of this
fictitious paper wealth, are keen not to see it disappear in a puff
of smoke, as threatened to happen with the stock market crash of
1987, the property market crashes of 1990, and 2007-2010, or the Tech
Wreck of 2000, or the financial meltdown of 2008. They want their
representatives in the global central banks to keep the prices of all
this paper inflated at all costs, including the cost of undermining
the real economy.

And, that is
why governments are not taking advantage of lifetime low interest
rates to issue large amounts of 50 year, or 100 year bonds, so as to
be able to invest in all of the infrastructure that their economies
require, in roads, railways, broadband, telecommunications, schools,
houses, hospitals and so on. Instead, the other side of propping up
the paper wealth of the top 0.001%, by using money printing to buy up
bonds, and keep their prices inflated, and then bailing out the banks
when they go bust, is instead to impose austerity on spending, and to
demand that the debt be cut at all costs.

Britain
needs massive amounts of such spending to modernise its economy. Its
estimated that the US needs at least $2 trillion of such
infrastructure spending just to make repairs, let alone to modernise
it. Similar investment is required across Europe. But, instead of
central banks printing money to fund such vital projects, the central
banks have instead printed money to simply stuff into the pockets of
those that own all of the paper wealth, so as to keep that paper
wealth at its current level. Britain could take advantage of being
able to borrow at such low rates to finance its spending on
infrastructure. So why don't they?

Over the
last few years, companies like Apple and Microsoft that have masses
of available cash on the balance sheets, have taken advantage of
these historically low interest rates to borrow even more. They have
used the money sometimes to buy back shares, which again inflates the
share price and flatters the company's earnings per share figures.
But, often the money has sat on the company balance sheet, the
companies have borrowed at next to zero interest rates, just because
they could, and because such opportunities may not exist in future.
There is no reason why a government, like a company, or a
house-buyer, would not rationally take advantage of these interest
rates, which are the lowest they have been in 300 years, and may
never be seen again, to borrow to meet its needs for capital spending
way into the future. As inflation rises, and it will certainly rise
significantly over the next 100 years, it will make the interest
payments become lower and lower in real terms.

In the end its interest rates that control share prices.
Even when the economy and profits are growing,
rising interest rates cause share prices to fall in real
terms, and the same process causes bond and property
prices to fall, because those prices are based on
capitalised revenues. Its the interest rate that most
affects the capitalisation process, especially at
absolute low levels of interest.

But, the
reason that governments have not being doing that should be clear
from the above. The rate of interest is determined by the demand and
supply of money-capital. A major source of additional supplies of
money-capital comes from realised profits. But, as the accumulation
of real capital slows down, and as productivity slows, so that the
rate of surplus value does not increase so fast, so the growth in the
mass of profits slows down. That is already being seen, and it
worries central banks, because asset prices have been massively
inflated with nothing, really underpinning them. The only thing
underpinning global bond, share and property markets is money
printing by central banks. The US Federal Reserve, even today, having
stopped QE last year, still buys large amounts of US bonds, because
it replaces, with new purchases, all of the bonds it holds that each
month reach maturity. The ECB is still actively adding to its stock
of sovereign and corporate bonds. All of that buying pushes up the
prices of those bonds, and pushes down their yields, which then has a
knock on effect on shares, and property values. But, if profits begin to shrink, no amount of money-printing and buying of assets by the
central bank will prevent those asset prices crashing, and crashing
much harder than they did in 2008.

The central
banks are trying to remove the adrenalin drip to these financial
assets. But, they did that before. In the early 2000's, profits and
growth were rising rapidly. Inflation also began to rise rapidly,
and central banks started to raise their official interest rates, and
pull back some of the liquidity they had been pumping into the system
over the previous twenty years following the crash of 1987. The
increases were modest, but it was enough to cause asset prices to
start falling, and that was enough for all those banks and others
that had made unsafe loans and mortgages, based upon ridiculously
inflated property prices to go bust. But, things have not improved
in the last ten years, they have got worse. Global banks balance sheets are even more based upon a total fiction of asset prices.

Asset prices
have been not only reflated, but inflated beyond the ridiculous
levels they were at in 2007/8. In 2008/9, the Dow fell to 7,500, and now stands at over 21,000. It is 50% higher than the Dow reached prior to the 2008 crash. The diversion of money-capital into
speculation rather than accumulation of real capital has further
undermined the potential for profits growth. The rate of growth of
productivity is slowing down. The US Federal Reserve has been
raising its official interest rates, and is set to continue. It is
now also saying that it will stop replacing the bonds it holds on its
balance sheet as they mature. It has had little effect on the real
US economy, because, in reality, the interest rate that consumers pay
on credit cards etc., or that businesses pay for business loans, where they can get them, has become totally divorced from the official
interest rates. But, it hasn't caused US bonds to fall in price
either, because for one thing, the ECB is still buying large amounts
of bonds, which means that liquidity is put into global capital
markets, which finds its way to US bond markets.

I think its
unlikely that central banks will withdraw their adrenalin drip
without there being a financial crash, but that financial crash is
coming anyway, because asset prices are astronomical, whilst profits
growth is slowing, and necessarily slowing. The obvious thing for
governments to have done over the last twenty years was to borrow
money with the issue of very long dated bonds, and to use this money
to modernise their infrastructure and their productive potential.
They did not do so, because during all that time they were mesmerised
by the astronomical rise in asset prices, that seemed to conjure
wealth out of thin air. A veritable magic money tree. And now they
are trapped. The experience of 2008, told them that if these
financial asset prices crash, it can have other effects.

Large
numbers of Tory voting homeowners, who have seen their house prices
rocket by 2000% since 1960, or 500% just from the late 1980's, will
not be best pleased when house prices fall by 80% from their current
levels, to get back to the historic averages. All of those who have
their wealth in the form of billions of bonds and shares, will not be
pleased when those values drop by 75%, as happened with the NASDAQ in
2000, when reality bit. Yet, the truth is that none of that actually
should change anything. A house is still the same house, provides
exactly the same comfort and shelter whether its price is £200,000,
or drops to £40,000. The drop in the value of shares, does not
change the ability of the factories, and machines within them to
continue producing goods and services. All that is actually required
is that the state ensures that the method of making payments to provide
the necessary currency for such transactions to occur, remains
functioning.

That is what
should have happened in 2008, allowing the banks to go bust, and
share, bond and property prices to collapse back to reasonable
levels. But, the central banks real interest is not with the real
economy. The reason they keep their official interest rates low, and
engage in money printing has nothing to do with stimulating the real
economy. It is designed to keep asset prices inflated, and thereby
protect the paper wealth of the top 0.001%. That is also why
governments have not been taking advantage of these record low
interest rates to modernise economies, and provide a sustainable
basis for economic growth and prosperity.

If
governments, issue large amounts of bonds, and use this money-capital
for spending on infrastructure and so on, that is money that is not
going into stock, bond and property markets to inflate those asset
prices. It represents a demand for money-capital, which thereby
causes interest rates to rise, and causes bond, share and property
prices to fall. The real economy is being sacrificed on the altar of
the belief in fictitious-capital.

About Me

Left school at 16. Became an ASTMS shop steward at 19, and a lifelong trade union activist. Delegate to North Staffs Trades Council 1974-87. Secretary North Staffs Miners Support Committee 1984-5. President North Staffs Trades Council 1985-6 and 1986-7. Delegate to Staffordshire Association of Trades Councils 1985-7. Delegate West Midlands Regional Council of the TUC 1985-7. Secretary Newcastle UNISON 2000-2.
Member of the International Communist League/Workers Socialist League 1974-87.
Went to University as mature student at age of 24. Obtained Joint Honours Degree in Economics and Politics with Philosophy and Statistics, followed by a Post Graduate Certificate in Education.
Labour Party member since 1974. Stoke City Councillor 1983-4, expelled from Labour group 1983, and resigned from Council in 1984 because of refusing to vote for rent and rate rises, and budget cuts. Staffordshire County Councillor 1997-2005.
Assistant Secretary Stoke District Labour Party 1981, and held pretty much every position from Executive member, to Branch Secretary, and Branch Chair.